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Union Finance Minister Nirmala Sitharaman (Photo: PTI)
Scheduled commercial banks should avoid engaging in long-term, high-risk funding and instead concentrate on mobilising deposits, retail lending, and supporting medium-term projects to prevent a recurrence of the non-performing assets (NPA) crisis caused by asset-liability mismatches, Finance Minister Nirmala Sitharaman said on Tuesday. She emphasised that institutions like NaBFID are better positioned to finance long-term projects than commercial banks.
“Banks should be the first source of mobilising deposits. They will have to gather deposits and lend. I am not saying that core businesses should be confined only to that. They can, of course, support projects in a very conscious way, medium-term and not very long-term,” Sitharaman said, speaking at an event in Mumbai. “…it cannot lead to once more that horrible situation that Indian banks were in, where there was asset-liability mismatch,” she added.
“And that is why it is not for them to go for high-risk, long-term funding, which is the business of NaBFID. It is their business for long-term funding, high-risk funding, not the scheduled commercial banks,” she further said.
The gross non-performing assets (NPAs) and net NPAs ratios of scheduled commercial banks have fallen to a multi-year low of 2.8 per cent and 0.6 per cent, respectively, in March 2024, after reaching a peak of over 11 per cent in 2017-18.
“So you got into that (asset-liability mismatch) situation, and together with it to aggravate it was also this phone banking where cronies were being given loans which you (banks) couldn’t retrieve at all. So banks will have to be conscious of what they do and how they do it, and essentially those which are very much in the bank board’s hands are avoiding asset-liability mismatches,” she emphasised.
Commenting on the important role Indian regulators have played in shaping the financial sector, Sitharaman said, “They (regulators) are doing a world-class job.”
“I think Indian regulators and the way in which they are functioning have actually brought greater transparency to the system, and Indian regulators are now being looked up to by even their peers outside,” she said.
Although she refrained from directly commenting on the ongoing issue with Sebi Chairperson Madhabi Puri Buch, she emphasised that there is a lot to be looked into regarding the facts that are emerging on the matter. “I strongly recommend that facts are taken on board before we discuss anything to do with the regulators,” she said.
Buch has found herself in the eye of a storm with allegations from the Congress party and US-based short seller Hindenburg Research questioning her objectivity in the Adani probe and allegations of conflict of interest while dealing with corporate files. Buch and her husband have rebutted all the claims.
Meanwhile, Sitharaman is of the opinion that the CPI basket and the WPI basket don’t seem to have much in common. “The WPI basket has certain items that probably should be in CPI. And the CPI also has some items in the basket that probably don’t have contemporary value as they once did,” she said, adding that there needs to be a thorough look at the components in the basket to ensure they are period relevant.
This year’s Economic Survey has suggested exploring whether India’s inflation-targeting framework should exclude food inflation. India’s Chief Economic Adviser V Anantha Nageswaran highlighted that monetary policy is a short-run macro aggregate demand management tool, which cannot manage aggregate supply shocks, and food shocks are predominantly supply shocks. However, RBI Governor Shaktikanta Das has highlighted that with food inflation comprising 46 per cent of the consumption basket, the pressures from it cannot be ignored by the monetary policy committee.
Commenting on the issue of freebies being provided by various state governments, Sitharaman said, “I am not in favour of freebies that cannot be sustained in your normal welfare kitty.”
“We don’t want freebies, but you cannot, in that name, deny the poor the help they need to get for some more time until they come out of the pathetic state of poverty, which nobody wants to be in. If (states) are able to extend some kind of help, it should be in alignment with their budgetary and fiscal situation.”
Meanwhile, the finance minister also highlighted the work done by digital investment platforms as post-pandemic, the Indian middle class has become risk-takers, turning towards the equity markets to invest their savings instead of parking their money in low-yielding deposits of banks.
“Post-Covid, you have many Indians willing to take that risk and enter the market rather than comfortably sit in low-interest-paying deposit accounts. I am not suggesting that this is better or that is better. It is up to the individual to take a call on where he wants to put his money,” she said. Interestingly, Sitharaman’s statements come at a time when Indian banks are struggling to mobilise deposits, with the RBI repeatedly directing banks to adopt innovative ways to attract deposits.
She has also urged banks to participate in the PM internship programme that has been launched. “These are internships; they are not jobs. But through this internship, we honestly believe the youth of India will be able to get a picture of what is expected of them. Therefore, I invite all of you to participate in this PM skill internship programme, which will give our youth an advantage,” she said.
Additionally, Sitharaman urged banks to plan for cyber security risks. “We need to stay ahead of the curve on it. Use futuristic technologies whether it’s AI, big data, cloud computing, or machine learning,” she said.
First Published: Oct 08 2024 | 8:22 PM IST
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